The Standpoint Research equity valuation and diagnostics model runs off a data feed that includes more than 150 variables. These variables are divided up into 32 categories. A color-coded profile is then generated showing how each stock scored on an absolute and relative basis in each of these categories. The 32 categories are then broken down and ranked on fundamentals, valuation, technicals, proprietary, accounting and miscellaneous measures. A weighted total score is then calculated.

Fundamentals and valuation get the heaviest weighting. Technicals are to a certain extent weighed negatively. For long recommendations, we look for out of rotation stocks with weak technicals that are scoring well on the majority of other factors. We look for in favor stocks with strong technicals that score poorly on the majority of other factors for sell and short recommendations. We will rarely recommend stocks that are trading near the top of their range, but will do so if the relative and absolute valuation is attractive. The model does generate recommendations on stocks that are trading near all-time highs/near the tops of their ranges. These recommendations do not occur often, because the model understands that at those price levels the stocks are usually priced for perfection, the risk/reward ratio is no longer favorable and the upside may be limited. Of course, these highs must be combined with other indicators to trigger an acceptance or rejection.

Companies that score well across the board are those that are paying attention to details, and outperforming the market and their industry on a wide range of criteria. Attractive valuation, good accounting, healthy dividends, improving margins, returns on equity, assets and capital, low price to sales, price to book and P/E/G ratios are just a few of the many areas we concentrate on. The model looks for combinations that have been back-tested and proven to result in out-performance. A few things the model highlights include stocks with low Price to Sales ratios and high/improving relative margins; weak technicals with good fundamentals and valuation; unusual deviations in price relative to the market and/or stocks it is historically correlated with and market over-reactions to good and bad news.

We look for out of favor stocks with an upside that is at least two, preferably three times the downside. We can’t always pick an absolute bottom, but are more often than not rewarded when the stocks go back in favor as is evidenced by our track record. There are elements of mean-reversion embedded in the model as well as scale-trading techniques used in commodities. Good stocks, just like commodities, have a floor price; a price that is so low that any supply hitting the market will be purchased at that price. The model looks more at relative P/E/G ratios than absolute ratios. If an industry is trading at multiples 1.3X their historical averages, it is unlikely a recommendation will be generated on that group. If it is trading at 0.7X, it will be more likely to catch our attention.

If a company is trading at 20X earnings, but our research shows that they have been consistently writing off expenses as one-time charges, they are in effect artificially deflating their P/E/G ratio. If we see a company writing off 25% of their expenses as one-time charges, it does not go ignored. If this company has a market cap of $6,000,000,000 with $300,000,000 in earnings that exclude a $100,000,000 charge, we value this company as though they are trading at 30X earnings and not 20X. If a company (during the trailing 12 quarters) has written off expenses amounting to more than 10% of reported net income as one-time charges, we do make internal valuation adjustments.

Note: This is a complex model that took many years to develop and back-test. It runs off hundreds of variables and calculations. This is merely a brief summary and only scratches the surface regarding the methodology and product description while protecting the proprietary nature of what we do. Feel free to ask if you have additional questions. See below for an explanation of our ratings.

Buy
At the time this rating is instituted, we forecast an upside of 50%-100% within three years and an out-performance versus the market by more than 1500 basis points within 6-12 months. We see an upside to downside ratio of 3:1 and expect it to outperform the market in a rising market by 2:1. In a down market, it is not expected to drop as sharply as the market. In a flat or down market it may take longer for our target price to be realized. Buy recommendations are recommended for both short-term trading accounts and investors who have a more patient buy and hold approach.

Sell / Short
At the time this rating is instituted, we forecast an under-performance versus the market by more than 1500 basis points within 6-12 months. In a rising market it may take longer for our forecast to be realized because our Sell recommendations usually are high-beta. We will usually issue these recommendations as a hedge against long positions. They will be distributed with greater frequency as the market rises and we feel the market is in short-term overbought territory. Sell ratings are issued if a stock is overvalued, faces risks and/or is in an industry or sector we feel will fall out of favor in the short-term if it hasn't done so already. If our Sell/Short recommendation drops in price by 15%-25%, we will recommend covering the short position.

Hold
If our Buy recommendation appreciates by 15%-25%, the rating may be dropped to a Hold if we feel that the move occurred too quickly and is vulnerable to a pull-back. We will tend to do this in a market that is over-extended in the short-term. In other words, if you are a short-term trader, we would take the profit. If you have a longer-term outlook, and the stock has not yet hit our 50%-100% target, it would remain a Hold.

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